Manufacturing New Business : Pacific Scientific Chief Says Its Growth Will Continue : EDGAR S.BROWER
Like many manufacturers nationwide, traditional labor-intensive manufacturers in Orange County are having a tougher time keeping costs down and competing with businesses outside the region, especially those in offshore countries.
In the coming year, with weaker defense spending and a possible national recession, manufacturers will have to work harder than ever to keep jobs in the county.
Chapman College economist James Doti expects the county to show a slight decline in manufacturing jobs in 1990 for the first time, though at least one other report is forecasting an increase.
One Orange County manufacturer that seems to be prospering despite the tough going is Pacific Scientific Corp. in Newport Beach, an aerospace and industrial instruments maker that has recovered from heavy losses in the early 1980s.
The company has succeeded by diversifying its product mix away from defense in the past five years, says Edgar S. Brower, chairman and chief executive of Pacific Scientific, a 30-year veteran in the manufacturing industry.
Before joining Pacific Scientific as chief executive in 1985, he was corporate group vice president at Allied Signal Corp. and president of Allied Electronic Components Co., a $12-billion subsidiary. From 1972 to 1977, Brower was assistant postmaster general of the United States.
In April, Harry R. Goff retired as chairman of the Newport Beach firm, and Brower assumed the additional title of chairman.
The company, which has 1,800 employees, reported second-quarter earnings of $1.8 million on sales of $46.9 million, recording its highest quarterly earnings in five years.
The company’s backlog of orders is about $100 million, and its dependence on defense-related products has declined from 30% in 1989 to 25% in 1990.
In an interview with Times staff writer Dean Takahashi, Brower talked about how a small-to-medium-sized manufacturer can survive in today’s economic climate.
Q. Can you describe what Pacific Scientific does?
A. Pacific Scientific is involved in two broad markets: aerospace and industrial. We’re very diversified within those markets. We’re just under $200 million in sales and so could be considered a medium-sized company that is fairly typical of Orange County. We have one plant in Yorba Linda with 200 employees, but most of our manufacturing is done in the Midwest, East Coast or offshore. Within this diversified framework, we make small-cost, proprietary products. About 25% of our aerospace work is military and the rest is commercial. In the military products, that same technology is usually used in industrial applications. We’re very mindful of the world trend to less military spending, which isn’t all that new. That trend was foreseeable even before the changes in the East Bloc.
Q. What are some of the products you make?
A. We are a leading manufacturer of fire-suppression equipment, and we’re developing fire-detection equipment. In Yorba Linda we make restraint systems, or seat belts, for pilots in both military and commercial airlines. We make high-speed power generators and power supplies for torpedoes, missiles and the internal workings of aircraft. We’re one of the major suppliers of DC motors and controls, a fast-emerging market in the last 10 years. We’re the major supplier and have a leadership position in making light switches that go on the top of street lights, and turn them on and off automatically in the morning and at night. We make energy-saving devices for utilities and instruments that indicate where there are faults in underground utility equipment. Historically, we were strong in the snubber business, or control and shock absorption in pipes in the nuclear energy industry.
Q. What is the firm’s history?
A. It’s a very old company founded in 1919 as a distribution company. It started out as a West Coast distributor of electronic widgets for the emerging airplane industry and made things like the magneto (the ignition generator) for the Spirit of St. Louis (the plane that Charles A. Lindbergh flew across the Atlantic in 1927). The company diversified in the 1940s and got into a whole range of businesses. In the 1970s, it got into the restraint business, or elaborate seat belts such as sophisticated systems for jet pilots. It sounds really mundane, but it is a very technical, precise business.
Q. When did the company take on its current character?
A. In the late 1970s. At that time, the snubber business took the company from the $20-million range to the $80-million range. It was very profitable and it was strong with the creation of the nuclear energy industry throughout the United States. But it collapsed in the early 1980s and so did the profits. When I came to the company in mid-1985, it was suffering from that change of technology and collapse of its highest-volume product line. We made some acquisitions and changed our strategy to emphasize the industrial side instead of military. We’ve very healthy and immune as any company to the current economic trends. All of the things happening in the economy now are short-term things that were predictable in the long term.
Q. Do you think we’re in a national recession?
A. I don’t think there’s any doubt about it. We’re seeing it in our markets that have capital goods involved, such as in selling motors to the automation industry. We’re seeing a definite chilling in which customers are not canceling orders but are watching their inventory. Is it a deep recession? No. Are we in a slowdown? Yes. It started about the fourth quarter of last year. We’re shielded somewhat in military aerospace, where we have a three-year backlog. Our commercial airline business is strong and isn’t seeing a recession. Our utility business hasn’t slackened yet. The only two businesses that are affected are our motors and controls business and the particle detection business, where we build contamination-detection equipment for manufacturing clean rooms.
Q. Whether you’re shielded or not, you are probably making changes to adapt to the economic environment.
A. We think we’re leading Orange County companies in adapting. We really have to organize around what I call our value chain. How are you going to satisfy the customer? That is what you have to organize around. Any company that doesn’t and is still divided into separate departments like engineering and research and development probably isn’t going to be in business five years from now. We started a transition to focus around a satisfied customer five years ago. You have to give them a quality product when they want it. We adopted what are commonly called world-class manufacturing concepts, such as just-in-time manufacturing and rapid-cycle manufacturing.
Q. Can you explain those concepts?
A. Just-in-time theory is aimed at satisfying the customer. To do that, you have to be very flexible in your delivery. You can’t have a lot of inventory because the inventory requirements could change very quickly with a customer’s changing needs. I order only the inventory I need for firm orders, and I can respond quickly. Instead of building big batches of orders, we now try to build one piece at a time as ordered. We arrange to make long-term commitments to our suppliers and let them know how we need to be flexible. If everybody in the chain adopts the concept, we can all respond very quickly to changing world markets. This is mainly credited to the Japanese, but we taught it to them and now it’s coming back to us. Rapid cycle is the same thing. Instead of having a lead-time on products stretching out to six months, we should be able to build a product in two days. We focus on eliminating all time that isn’t devoted to enhancing the product. When I came here, we were delivering motors and controls in 18 weeks. Now we have a standard lead-time of two weeks from scratch. To do this, you have to organize differently. Instead of having an engineering department, you have cells of people with representatives from each department, such as marketing and engineering, and they live for one particular customer or product. In some of our factories, we make a room for a customer and paint their logo in the area to let them know that it is dedicated to them.
Q. Orange County’s manufacturing base seems to be shrinking, with some companies moving out of the county and some just shutting down. What is the problem?
A. I think it’s a trend all over the United States right now, with companies going out of business because they haven’t made the changes that we just talked about. The one problem that Orange County has, if not Southern California, is that the cost of infrastructure is very high. It’s very hard for direct-labor people to find satisfactory living conditions. Housing affordability is down so low that about 19% of the population can afford to buy a house. It’s very hard to attract a direct-labor force with that kind of infrastructure cost. Those things have a way of balancing out when you talk about the worldwide competition. There will be fluctuations, and Southern California remains very entrepreneurial with strong start-up rates. Q. What about environmental restrictions imposed by the South Coast Air Quality Management District?
A. I think California leads the way in progressive changes in the world and there is a value to that. I hope environmentalists, in considering the worldwide competitive market, will show restraint in their timing. Their goals are very laudable, but we have to keep in mind that we have to compete with and evolve with the rest of the world. There will be some times when we will be out of sync, but it won’t be that big a factor.
Q. Do you think that the defense layoffs in Southern California could make a recession here worse than what might happen in the rest of the country?
A. I don’t think so because the defense industry is so diversified. California has a strong balance of industries, too. There are a lot of major corporations here and very few of them are totally military. Most of them are a combination of military and commercial aerospace, which is still strong.
Q. How much will the high-tech industries be able to absorb the defense layoffs?
A. I don’t know. You would have to look at start-up rates and employment rates. We have always had a lower unemployment rate than the rest of the country and a good entrepreneurial spirit. I see no trends to change that. We also have a very high-age profile because of the climate. As that group starts to retire at a faster rate, that will also put a great demand on new employment. I think also there’s a real question about the area’s regional product, when you have these defense layoffs, that they are really a small part of the total population of the state. When we read announcements that 17,000 people are going to be laid off at Douglas Aircraft Co., that sounds like big numbers. But it’s a very small percent of the jobs in the state. Through our own fears and our media we tend to greatly exaggerate those events.
Q. You said Pacific Scientific is diversifying away from defense now. It seems almost every defense company is doing that. Is there a smart way and a bad way to do it?
A. Obviously the best way to do it, and the way that we’ve been doing it, is to multi-use the technologies. Take our restraint systems, where we have a leadership position in military aircraft. We’ve used that same technology and know-how in the commercial cockpit and the passenger seats. We apply the same principle in our fire suppression and detection business, with modifications that are appropriate. We stayed out of technologies where you can’t work both sides of the street.
Q. Is there anything you’re advocating on a national policy level that would help manufacturing?
A. You can’t have federal and trade deficits go on forever. The quicker one addresses those problems, the less chance it will have of being a depressing influence in your markets. So we feel Congress and the President really need to address that. Not in one day, but they clearly must address the problem. If you look at the rest of the world, such as in the East Bloc, you see they will need a tremendous amount of capital to develop. We must help them get that capital if we are to sell our technologies in their markets. In China, India and Western Europe, they will also need capital. We’ve been generating and using capital ourselves for so long, but the rest of the world must develop if we are to avoid economic chaos. We have to have a much stronger energy conservation and development program than we now have because those are the two areas the rest of the world will soon need.
Q. To what extent will Pacific Scientific’s sales growth follow the health of the economy?
A. If you look at our markets, in utilities it is almost countercyclical. As the economy tightens, the utilities try to conserve and therefore tend to want devices we sell. In military aerospace, we’re in low research areas of the business. They will always need seat belts, power supplies and missile devices. That will follow the perception of threat in the world. Our only areas that are susceptible to economic trends are our instrument business and our particle detection business. But in developing today’s new products, most research companies need clean-room environments and that is what our particle-detection business serves. If you look at the world’s needs, I don’t think the recession will last long. I would be surprised if we’re still in a downturn by the end of 1991 because the world markets will drive growth. Since we are worldwide manufacturers, we’ll participate.
Q. What kind of growth does Pacific Scientific expect in the next year?
A. We expect moderate growth, certainly better than the rate of inflation. If the economy doesn’t pick up by the end of 1991, the growth will be only slightly better than inflation.
Q. What hiring requirements will you have?
AThey won’t change much. The implementing of world-class manufacturing concepts means we’ve cut out wasteful activities and so we have less need for new people. We’ve taken care of those cuts through attrition. We have become more efficient and so won’t need to hire large numbers of people.
Q. Do you see most other manufacturing companies doing the same?
A. Yes. I think the biggest labor changes will occur in the service industries as they apply the principles of efficient operations to their own work forces. That will probably lead to big changes in Orange County, where companies in the service industry become more competitive by applying just-in-time and rapid-cycle principles.
Q. What are your thoughts on Japanese competition in manufacturing?
A. I think the Japanese have done two things in manufacturing that have made them dominate the media. Through their government, they have taken a very long-term approach in manufacturing. Their cost of capital is far lower, up maybe 2% in the last 10 years compared to 10% in the United States. You can’t compete in a world market with those kinds of differentials. They said they would capture electronics by investing in world-class manufacturing concepts and being very innovative. They also did a very good public relations job of selling the quality of their products. Over the next 10 years they will have a difficult time matching the growth of the last decade.
